The Street Unplugs Tesla; Now, Buy the Stock

by Jim Woods | February 22, 2013 8:10 am

The Street Unplugs Tesla; Now, Buy the Stock

A few months ago, Tesla Motors (NASDAQ:TSLA[1]) was basking in the limelight of what is perhaps the auto world’s most prestigious plaudit, as its new Model S sedan was crowned Motor Trend’s[2] Car of the Year[3].

The award was accompanied by a serious pinning of the share-price throttle by investors (I would say gas pedal, but that doesn’t apply to Tesla’s all-electric vehicles). In November, the stock began a major run higher that continued through this Tuesday and sent shares soaring more than 31%.

On Thursday, Wall Street slammed the brakes, as TSLA hit the rev limiter, and subsequently plunged more than 10% in the session.

The catalyst for the stock’s loss of engine power was its Q4 earnings release. The numbers showed that the trendy all-electric vehicle maker, and the brainchild of the high-profile CEO Elon Musk, missed bottom-line expectations. Tesla said during the final quarter of 2012, it lost an adjusted 65 cents per share, which was much wider than adjusted EPS forecasts for a loss of just 53 cents.

Click to Enlarge The company did manage to best top-line estimates, seeing revenue of $306.3 million, which was firmly above $298.9 million. However, the bottom-line miss has spooked traders, hence the selloff in the high-flying momentum stock that sent it plunging well below its short-term, 50-day moving average (shown in the accompanying chart).

In comments accompanying the Q4 earnings release, Musk told investors that he expected the car company to be profitable earlier than originally anticipated. In a letter to shareholders, Musk wrote, “We expect to be slightly profitable (excluding only non-cash option and warrant-related expenses) in Q1 2013.”

That’s well before most on Wall Street were anticipating. In fact, the analyst I know didn’t think the company would turn a profit until Q3, so that tells me Musk & Co. are way ahead of the corporate pace car on the profitability lap.

Still, the stock hit a roadblock, and perhaps traders now think the money has been made in this stock for the time being.

I suspect this could be true, at least in the short run, especially now that the general market seems to have done an about-face. But if you believe Tesla’s expectations going forward (and I do), and if you just look at the positives for the company, I think any significant pullback in the stock represents a very attractive long-term buying opportunity.

Some of those positives were outlined by Musk, as he said that “Tesla-powered cars have now been driven more than 40 million miles.” He also wrote that vehicle production is “now reliably at an annualized rate of 20,000 units per year.” Musk also told analysts on the Q4 earnings conference call that production rates could be ramped up later this year. That would likely be great for buyers, as the current wait for a Model S sedan is about five months.

Another metric arguing in favor of the company’s fundamental soundness is Tesla’s target for more than 25% gross margins once production efficiencies have been worked out and put in place. Musk wrote that he expects Tesla’s gross margin to be in “the midteens percentage range” this quarter. “We expect our gross margin to continue to rise into the second half of the year to our target of 25%,” wrote Musk.

Always one to protect and defend his firm in an outspoken fashion, Musk recently took on a story by John Broder of The New York Times. The story, titled, “Stalled Out On Tesla’s Electric Highway,”[4] told the tale of a disastrous cold-weather vehicle test drive on I-95 that resulted in the Model S losing power more quickly than he expected after it was parked overnight, and not plugged in, in a cold garage. The vehicle then ran out of juice on the trip well before the estimated mile range of the vehicle, according to Broder, and then it had to be towed to the nearest charging station.

Musk took to the twitterverse, calling the article a “fake.” He also published a detailed rebuttal to the Times piece on the Tesla blog[5], which provided in-depth metrics on the Broder test drive, including graphics and other supporting data refuting the story’s claims.

For investors, the tenacity of Musk’s defense, as well as his expert stewardship of the firm, lead me to believe that TSLA will be a lot higher six months to a year from now. Could there be more selling TSLA if the market corrects? Sure. But will today’s selling be looked back upon as a buying opportunity in the stock?

I say bet on it.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.